Jul 21, 2010
Executives
Theresa E. Wagler - Executive Vice President and Chief Financial Officer Keith Busse - Chairman and Chief Executive Officer Richard Teets - President and Chief Operating Officer, Steel Operations Mark Millett - Executive Vice President of Steel Operations Gary Heasley - Executive Vice President of Strategic Planning and Business Development Fred Warner - Investor Relations Manager
Analysts
Kuni Chen - Banc of America/Merrill Lynch Michelle Applebaum - Michelle Applebaum Research Timna Tanners – UBS Luke Folta - Longbow Research Sal Tharani - Goldman Sachs Mark Liinamaa – Morgan Stanley Mark Parr – KeyBanc Capital Markets Charles Bradford – Affiliated Research Group Tony Rizzuto – Dahlman Rose & Company
Operator
Good day everyone and welcome to the Steel Dynamics Second Quarter Earnings Conference Call. Today's conference is being recorded.
Joining us today are Keith Busse, Chairman and Chief Executive Officer, Richard Teets, Executive Vice President of Steel Dynamics Inc and President and Chief Operating Officer of Steel Operations, Mark Millett, Executive Vice President of Steel Dynamics Inc. and President and Chief Operating Officer of OmniSource Corporation, Gary Heasley, Executive Vice President of Steel Dynamics Inc.
and President of New Millenium Building Systems, Theresa Wagler, Executive Vice President and Chief Financial Officer of Steel Dynamics Inc, and Fred Warner, Investor Relations manager. For opening remarks, I will turn the call over to Mr.
Fred Warner. Please go ahead sir.
Fred Warner
Thank you and welcome to the Steel Dynamics second quarter of 2010 conference call. The call is being webcast live July 20th, 2010 from Fort Wayne, Indiana.
Later today, you will be able to replay the call from our website or download the call as a podcast. During today's call, our management will make some statements that are forward-looking.
All statements regarding anticipated future results or expectations are intended to be forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements, which by their nature are predictive and are not statements of historical fact are often preceded by such words as believe, anticipate, estimate, expect or other conditional words.
These statements are not intended as guarantees of future performance. We caution that actual future events and results may differ materially from such forward-looking statements or projections that we may make today.
Some factors that could cause actual results to differ include general economic conditions, governmental and monetary and fiscal policy, industrial production levels, changes of market supply and demand for our products, foreign imports, conditions in the credit market, price and availability of scrap and other raw materials, equipment performances or failures or litigation outcomes. You may find additional information concerning a variety of factors and risks which could cause actual results to differ materially from today’s forward-looking statements.
Refer the section entitled ‘Forward-looking statements and risk factors’ in our most recent annual report on Form 10K and in other quarterly reports on Form 10Q as well as in other reports to be filed from time to time with the SEC. Those are publicly available on SEC’s website, www.sec.gov and on our website, www.steeldynamics.com.
Now let’s begin today’s call with comments from our chairman and Chief Executive Officer, Keith Busse.
Keith Busse
Thank you Fred, good morning ladies and gentlemen. Thank you for joining us today.
As you can see at our report, our second quarter was -- it was a fairly decent second quarter when you consider a kind of a lackluster environment for flat-rolled order entry that occurred late in the quarter and certain mechanical issues, specifically transformer issues that we encountered. We are in $49 million of net income versus a loss of $16 million in the prior year’s second quarter; declining $0.22 a share versus an $0.8 loss.
Versus the first quarter, net income was down from 65 million to 49 million and earnings were down from $0.29 to $0.22. As reported, our second quarter sales boom of 1.6 billion were more than double our sales for the second quarter of ’09 and were 5% higher than the first quarter as you can see later in the body of the report, much of that due to average steel selling prices increasing by $93 per ton during the quarter.
Second quarter shipments of 1.3 million tons were 43% higher than ’09 but were 10% lower than the first quarter and I think that’s really a point where I would pause and say when you look at our operating income per ton of $108 in steel, and our volume from quarter to quarter being of 142,000 tons, had our volume not been often been at least the same as the first quarter, I would imagined our operating profit would be higher than $108 a ton and when you multiply that kind of a number times the decrease in shipping volumes that occurred because of some (inaudible) mechanical issues, we lost about somewhere between 15 and $17 million worth of operating income, and when you combine that with our second quarter in recycling that being is good as our first and the operating income declined there. You put those two together and multiply it times 60% for a tax effect and profit sharing etcetera, we could have done -- if we should or could -- we could have done $0.9 better than the previous quarter above $0.30 so for me, one of the takeaways is the pretty steady Eddy [ph] operating profit per ton being generated, which was about $9 higher than the first quarter.
We also mentioned -- while selling price has increased $93 a ton during the quarter, scrap costs also increased by $49 during the quarter. Our steel operating income though was not down very much as you can see, down from 138 the first quarter to 134 million and most of the decline in income really occurred in the recycling arena, if you will, which Mark Millett will speak to that in greater detail.
I couldn’t help but look at the consolidated statement of operations and note that for 6 months ending period in ’09 we had lost $104 million and this year we made 114 million. Obviously, $220 million turnaround when you measure 6 -- that period when we went from a loss of $0.56 a share to a profit of $0.51 a share which -- in what is really a pretty shaky economy for the most part, having its fits and stats and ups and downs if you will.
As we noted here, we did see some weakness, some flat-rolled order entry and bounced up and down in late May and came back a little in June and then declined at the end of June and rather lackluster at the beginning of July, which I think is really reflective of the fact that most of industrial America goes on vacation early July usually and you have -- follow your change over events and what not, so it would be expected that shipping -- that order entry late in the quarter and shipping early in the third quarter would be impacted by that usually is almost every year unless you had a very, very strong economy. We also talked about the fact that we had a malfunctioning melt shop transformer at Butler, and that is repaired and running well, although we’ve had some -- we had a capacitor bank fail in July on our static core [ph] system and were on a loss to run at the highest level of melt shop tap rate, which is going to affect volume in July as will rather weak order entry as well.
So we don’t expect July to be a real strong month going forward, but I think August and September have some pretty decent prospects. I think we’ve kind of reached the bottom of pricing in the steel community.
I think we -- I believe we’ve reached the bottom and I believe as we progress into Autumn and early Fall, I think you’ll see a better pricing environment and perhaps even more margin available to the steel side of our business. As it relates to scrap, I read some morning commentary that certain folks believe that scrap was probably going to be up sharply in August.
I don’t believe -- that’s a personal opinion, that that’s going to be the case. Weak order entry across sectors -- entire sectors and segments coupled with decent inventory levels and certain scrap arenas and weak export and declining price environment recently in steel would lead me to conclude that you’re not going to see any strength in August in the cost of ferrous resources.
I’m not sure how much it could decline or advance but I don’t think it’s going to advance by 20 or 30 bucks a ton, there’s some where advertising could be the case. But I do believe you’re going to see a better priced environment as you walk forward late August and September for resources.
Mesabi Nugget, as you can see, we lost about $12 million there, not a whole lot different than what we had lost in the first quarter. A lot of mechanical issues occurred, Mark will talk about that and we replaced equipment, upgraded equipment, are in a much better position than we were.
Metallization is very, very good. The tests we’ve run on the nuggets were very high on them so it’s a matter of delivering volume at this point in time.
So as we roll forward, we see the steel markets for our products remaining relatively steady with some short term uncertainty surrounding the demand for flat-rolled steel, I think primarily tied to order entry at the end of June, early July (inaudible) change overs and outages and vacations and what not. But I do believe it will strengthen, and pricing could strengthen as we go forward.
I don’t really look for the economy to sharply strengthen, I don’t think it’s going to go backwards and I don’t see it double dip here. Therefore progress will be probably just slow and steady.
As it relates to our structural business we ran a little higher operating rate in the quarter than we had, shipped a little bit more than we did in the first quarter. But it’s still a fairly weak environment for heavy structural products.
Our other long products output remains in good shape. We have excellent backlogs at SPQ shop in Pittsboro and excellent backlogs at Lonout [ph] and Steel West Virginia.
So there’s some strength there in small bars, at least in our camp. It’s kind of steady as you go with a mildly improving environment for structurals and serving up and down really close to ride with regard to flat roll and we said we would have board say about it later on which has become our practice to really comment on how we see the quarter evolving a little later in the quarter.
So that’s kind of the synopsis as I see it of really where we were. You probably note that most of the loss in shipments was between either the flat roll division or the checks.
Pretty steady shipping volumes, up a little in structural and up a little in engineered bars and roll out about the same roll out performed at a much better level had they not encountered transformer issues which we believe are currently resolved. So with that I will the commentary over to Mr.
Teets to talk about our steel making efforts and then to Mark Millet to talk about resources.
Richard Teets
Thank you Keith. Good morning.
I’d first like to acknowledge some of the excellent safety efforts at our steel facilities. I’d like to note that Roanoke bar division worked the second quarter without having a reportable incident.
Great job by the Roanoke team, thank you. During the second quarter at Columbia City, they eclipsed the 1 million man hours worked milestone without a loss-time injury.
Congratulations to Dean and rail team on that accomplishment. A couple of comments about each of our major facilities as far as operations go.
At Butler as Keith mentioned we saw orders trail off slightly into end of the quarter. We therefore made the decision to swap out the EAF transformer as we were operating one with a repaired bushing and a history that has shown failures, a failure is probable.
Therefore we took about a five day outage to make the switch and it was a very smooth job, safely and on time and congratulations to the team for that effort. Also at Butler our galvanizing and painted products backlog probably is the bright spot, it has extended itself further than it has in at least a year and continues to be where we’re focusing.
We believe that customer shipments in flat roll continued to increase month over month while inventories remained manageably low. At Columbia City we’re currently commissioning the Number 2 Casting machine, support strand, blue and billet machine has been casting a couple of hits a day to work in and about, there’s relationship progress being made at Columbia City.
Also there the medium section mill has successfully returned to production as licensing products coming out from both of our mills now. And there’s nothing positive to say about the construction market but we’ll say that we’re focusing on the rail production for the third quarter and we’re forecasting around 30,000 tons and growing and that’s annualized would be 100,000 tons for the year.
So we’re excited about the progress being made in quality and in quantity at Columbia City with rail. At Pittsboro as Keith mentioned we have a very strong backlog, in fact yesterday we announced a $40 ton price a piece.
Effectively they are in this quarter on all products not covered by pricing agreements previously negotiated. We’ve seen an increase in enquires to products in the line of motors plus a trucks and heavy equipment areas as well.
We’ve had year’s worth of challenges and other note during the second quarter. The melt shop experienced a 20 day outage due to a string of EAF transformer failures.
I’m happy to say that after subsequent bushing period here in the beginning of July, they are back running strong and making up ground. During June the melt shortfall produced about 3 days of rolling and impacted shipments probably about 7,000 tons of those, 1,000 tons of phoenix bars.
At (inaudible) we remained with coated optimism as our core markets of sub-trailer and industrial lift trucks show slight signs of improvement. All of the team there has been recalled and we are actually in the process of interviewing for additional permanent employees.
We took an extended shutdown the melt shop at Steel West Virginia to upgrade the fume collection system to be compliant with our title five permit. All went extremely well with only detail work and compliance testing to be completed.
Also congratulations to the steel electric unit number one rolling on team for successfully commissioning some new miscellaneous channel inspections. Additional sections are scheduled to be trialled this quarter.
Great job by everyone there and again not much to report for the Tex, they’re experiencing the same market pressures as Butler. We continue to use this time for equipment upgrades and maintenance needs.
Across the board we remained focused on safety, quality and efficiency to be prepared for when the markets opportunities return. Thanks to the team for your efforts.
Keith Busse
Mark.
Mark Millett
Well good morning everybody. On recycling side of the business ferrous scrap demand was robust during the quarter, shipments totaling about 1.3 million tons, up 10% quarter over quarter.
This was our highest quarterly shipping volume recorded since the 2008 end term. Now it’s double the volume recorded the same period last year.
April, May shipments were particularly strong. Our June dropped off in concert with reduced domestic fill low utilization rate.
Inbound scrap during the quarter remained relatively stable. 0.2% of the ferrous shipments were internal to SDI steel mills.
Together to note I believe that although for some (inaudible) slightly hit the markets pricing starting through the quarter. Increased volumes resulted in total gross margin dollars from our first business remaining essentially unchanged quarter over quarter.
In (inaudible) our shipping volumes remained level quarter over quarter at approximately £235 million. However, our financial results declined paralleling the base level markets as they were negatively impacted by Southern base climbs in Europe, strong dollar, the signs that the Chinese market is decelerating.
Still going (inaudible) the interest of hedge fund managers were speculative in the industrial melts. At the beginning of 20 month high in April, $3.59 per pound caused the prices continued to stumble through the months of May and June.
Volumes were 270 before slight recovery to 293, a loss of 17% over the quarter. Aluminum dropped 16% boring from above 5 to $0.88.
Nickel, the principal value of our stainless metal dropped 21% from $11.34 to 896 a pack. Systemic trends significantly eroded on non-ferrous module.
On resourced (inaudible) second quarter of the income, as you saw it was $25 million was compared to $43 million in the first quarter. Whereas our ferrous corporations were essentially flat as they did quarter over quarter, their operating income falling just $3 million in the then market.
Our non-ferrous operations declined approximate $15 million to impede the impact in that ring. Two third of this decline was direct margin compression while approximately a third of decrease was associated with unrealized market to market adjustments for our hedging positions.
If you compare quarter to quarter, these adjustments resulted in a gain during the first quarter of about $4.2 million and a loss during this most recent quarter of roughly $400,429. Moving to Minnesota, commissioning, as Keith suggested, the Mesabi Nugget project has been progressing well, a little over 19,000 metric tons being shipped in the second quarter.
Two principal factors limited production in the quarter. Basically a seven day edit was taken in May to investigate and subsequently eliminate a potential safety concern and then secondly as I believe I discussed in the last call, the drawing systems for the cooling drum was under design as limited throughput to a maximum of 55% of its total mass capacity when we’re running full ring.
These issues have been corrected during the current July adage which is coming out of that in the next couple of days. These issues aside, many other equipment and process improvements have been achieved.
Changes to material conveying systems, (inaudible), practices and other equipment improvements increased operating availability to about 50% during the month of June, although it was 70% being achieved in the last week of June before we went back to (inaudible) competitors. The respective supplying system was commissioned allowing improved raw material conversion yield for significant cost improved.
Further process draining has led to continued product quality enhancement, the nugget composition. Again as Keith mentioned it’s excellent, it’s on a consistent 97% iron content.
Substantially above that value in conventional imported pig iron and furthermore the science content in the product which is a combination of small quantities of iron and small particles of VI, has been substantially decreased. In fact the electric-arc furnace shop in Butler (inaudible) has consumed all materials shipped today with excellent results.
Although second quarter pre-tax loss increased slightly quarter over quarter, if you look at the operating loss, it actually improved marginally from 9.6 million down to 9.3 million and profitability is still expected to be achieved before the end of the year. So thank you to all our teams, (inaudible) gentlemen and ladies.
Keith, back to you.
Keith Busse
Again Gary, fabrication switch.
Gary Heasley
Sure, thanks Keith. As everyone is aware now residential construction continued to be weak and is likely to be weak for some time.
However, with the joint business we’ve seen inventory rise, bookings have stabilized. Actually bookings are up slightly for the year in date numbers and while shipments are down slightly reflecting (inaudible) everyone has coming into this year.
With the combination of bookings lean up slightly and looking at what’s going on in pricing, pricing is improving as well. It appears to us that our belief that the industry really bottomed in the first quarter of 2010 is probably correct.
The recovery that we expect to come in the joint business is going to be slow, it’s going to take a lot of time but it is not getting any worse and is getting in fact a little bit better. Now price improvements that we’ve seen so far year to date are partially offset with increased field costs and that continues to keep margins tight.
But we have grown share beginning in late 2009 and we further increased share, one of our major competitors exited the business early this year and that is reflected in the significant increase in shipments that we’ve seen in the second quarter over the first quarter. So good news in pricing, good news in volumes and it’s clear that things will continue to improve.
We see light at the end of the tunnel, the environment remains challenging and will continue to be difficult but we do see steady improvement from here. We believe that this business is going to recover, we’ll get back to positive earnings well before the overall recovery has been on residential construction market by keeping a tight focus on costs and growing our share for more times through the shops.
So that’s where we are from here. Keith, back to you.
Keith Busse
Thanks Gary. Theresa, would you provide some balance sheet commentary and other statistical data as you usually do.
Theresa Wagler
Thank you Keith. Good morning everyone.
During the first quarter, we maintained our liquidity at 1.1 billion which represents our cash on hand plus our $924 million revolver. Our leverage ration continued to improve as total debt to EBITDA was 3.5 times at June 30th versus 4.1 times at March 31st and additionally our interest coverage ration improved quarter over quarter from 3.8 times to 4.4 times.
Our NASDAQ increased $36 million during the quarter. Cash flow from operations were $19 million verses 73 million achieved during the first quarter as funding was required for working capital.
Specifically, inventories increased to $117 million worth 13%. This is driven by increased volumes and pricing in finished goods and raw materials that are steel operations.
Most notably at the (inaudible) positions which absolutely makes sense given the averages that they had during June. Additionally, our raw material inventory associated with our continued ramp up of nugget operations increased working capital by about $18 million.
We currently anticipate a rather neutral impact cash ferrous rate working capital movement in the third quarter and a normal seasonal trend of decreased needs in the fourth. During the second quarter we received just over $90 million in Federal income tax refunds and we expect to receive an additional 10 to 12 million dollars during the fourth quarter.
Our effective tax rate before minority interest during the second quarter was 39% versus a 35.2% in the first quarter. Our second quarter rate was much higher than we had anticipated.
We currently estimate our full year 2010 effective tax rate before minority interest to impact like 38% which will represent a second quarter range around 38.5. During the quarter our capital expenditures totaled $41 million.
Depreciation was $42 million and capitalized interest associated with these projects was 1.9 million. Capitalized interest is expected to further decrease during the remainder of 2010 as our capital projects are coming to completion.
Our outlook remainder of 2010 depreciation and (inaudible) remains at between 55 and 50 million dollars per quarter. Our net interest expense during the quarter increased $5.2 million compared to the first quarter.
The change is both a reflection of decreased capitalized interest of 1.5 million and our changing capital structure with the addition of a 350 million of Gino note issued in March 2010. Gross interest expense for the quarter was $45.4 million with an effective interest rate of 7.3%.
We had 216.8 million shares of common stock outstanding at June 30th. We also had in the dilution factor convertible notes with underlying shares of 16.4 million and diluted options of 1.6 million.
Our expectations for the third quarter would be to have diluted outstanding shares of approximately 235 to 235.5 million shares. I know many of you like to have the flat roll shipments breakdown so for the second quarter, our hot roll shipment was 276,000, our pickled and oiled was 66,000, cold roll 41,000, hot roll galvanized 95,000, cold rolled galvanized 57,000, painted 68,000 and Galvalume 20,000.
Keith.
Keith Busse
Thank you Theresa. Vicky we’ll proceed right away to the Q&A piece of the report.
Operator
Thank you. (Operator Instructions).
We’ll go first to Kuni Chen with Banc of America/Merrill Lynch.
Kuni Chen - Banc of America/Merrill Lynch.
Hi, good day everybody.
Keith Busse
Hi Kuni.
Kuni Chen - Banc of America/Merrill Lynch.
How are you doing? I guess just first off, clearly from your discussion here the near term outlook and the ton going forward is a little bit more cautious.
Can you just give us a little bit more color on that? Is that more from this day a pricing perspective or from a volume and demand perspective and then certainly with the flat roll volume being down sequentially in the second quarter.
Can you give us some flavor on how much of that sort of comes back in the third quarter?
Keith Busse
Well, I think from a long product perspective we’ll see increases probably in the third quarter simply said. Flat roll perspective, the weakness is really going to be exhibited I think in July from an order entry perspective.
I think you’re going to see strengthening order entries. Already started to see it here in late July and I think that could continue.
I think underlying demand remained steady. I think you have people that were working off a little stronger inventory platforms going into the summer outages, scrap prices were declining, steel prices were declining.
Probably a lot of folks sitting on their hands because I said I think we probably are very close to a bottom and I think you’re going to see steel prices rebound at some point in time during this quarter and I don’t have any specific time frame for that to occur. But during the quarter, I think you’ll see it start to strengthen and as I said I think you’ll start to see ferrous scrap prices later in the quarter perhaps start to strengthen as well.
My comment about ferrous scrap was really kind of limited to what you’re going to see here at the end of July for delivery in August. I think there’s still going to be some weakness out there but I think once you get through that weaker period it will strengthen going later into August and maybe so.
At least for deliveries in September and October, save a little drag around (inaudible), the weak order entries that we experienced in late June and early July probably came at a good time. As I said earlier, we lost a bank anesthetic bar system which isn’t allowing us to run the melt shop at full capacity.
So I guess the two are matching up fairly well but they’re still going to leave July a little short followed by increased expectations for August and September.
Kuni Chen - Banc of America/Merrill Lynch.
Okay, got you. I guess there’s one quick follow on up, I’ll turn it over.
I guess lately we’ve seen some recent new capacity announcements in the electrical corner sector. Does that impact your own plans or thought process as far as what you may do down the road?
Do you feel like you may need to put a stake in the ground at some point before somebody else can sort of beat you to the punch?
Keith Busse
Are you talking about long products or flat roll?
Kuni Chen - Banc of America/Merrill Lynch.
Either.
Keith Busse
Well I’m not aware of any new flat rolled projects that are concrete. We’ve talked about Irish for some period of time and we’re still working on it.
Discovering new technologies and modifications to existing technologies that we’re kind of excited about; we haven’t quite dug up the last one of them but Dick and I are pretty positive about the project and the likelihood of it going forward. But I’m aware of any other significant electric art projects that are -- have been announced for the United States anyway.
And in long products we’re kind of a smaller player, obviously Mr. Crany’s [ph] rebar project is under development right now and they may move forward with one or two additions to the rebar universe in the due course of time but I haven’t seen any of their growth announcements to any long products.
Kuni Chen - Banc of America/Merrill Lynch.
Okay, great thank you.
Operator
Moving on we’ll go to Michelle Applebaum with Michelle Applebaum Research.
Michelle Applebaum - Michelle Applebaum Research
First I want to say, I know it was a weak quarter but I want to point out that you were upfront, you were ahead of us on that and I think on the conference call in April you said that the $0.37 forecast for second quarter at that point was too high. So congratulations on reining us in.
And for anybody who knows you well as I do, Keith, that that is impressive, so congratulations on that. The second thing I wanted to ask you about was, can you give me a little bit better tool to do a forecast for the recycling business for next quarter?
It's a bit more challenging; it seems to be more volatile and it's a new line of business and I understand it's been going through some restructuring. What are the moving pieces to look at?
Keith Busse
I think one of the encouraging things, and I’ll let Mark speak to this, but one of the encouraging things that he told everyone this morning is the margins were fairly stable in the ferrous end of it and a little loss of margin but not a lot and volume was up. I don’t expect volume is going to sag and there could be a margin challenge in July here, maybe even a little bit in August, but we’ll rebound quite nicely from that.
I think you saw the impact was really a non-ferrous we would have expected that that could return as well. But we have indeed taken a lot of hard costs out of recycling and as volumes continue to grow I think that will bode well for us.
And I think the environment going forward in recycling as you look deeper into the year and probably ’11 is probably for a lot better strength. Mark, do you want to comment on that?
Mark Millett
Well, Michelle, I think we’re having an equally difficult time trying to forecast but…
Michelle Applebaum - Michelle Applebaum Research
I know it's not doable.
Mark Millett
But I said in both of the last calls, predicting what’s going to happen both in the ferrous and non-ferrous markets is tough more than a couple of weeks ahead. But generally I think that on the ferrous side of our business we did well, in a down market, prime scrap last quarter down twenty bucks.
So obsolete scrap down 30 to $40, and in that environment to maintain kind of a flat margin was very, very good effort by the team. As Keith suggested, July’s pricing down in one month $40, $45, we will have a little bit of a (inaudible) in June, July but I do believe August and certainly September is going to be strengthening market for us on pricing spread and volumes will be…should be sideways I think.
Michelle Applebaum - Michelle Applebaum Research
Mark?
Mark Millett
Yes?
Michelle Applebaum - Michelle Applebaum Research
Can I ask, is it possible we could have a quarter that looks more like the first quarter than the second in terms of results?
Mark Millett
I don’t believe so.
Michelle Applebaum - Michelle Applebaum Research
You don’t think so?
Mark Millett
No.
Michelle Applebaum - Michelle Applebaum Research
But the quarter would look more like the second than the first?
Mark Millett
I would hope slightly better than the second but again it depends where the market goes to be honest. Because the non ferrous, as you can see from this past quarter the non ferrous side of our business is quite influential on our bottom line.
And if you look back at history, and I mean history being the last two, three, four years, non-ferrous and ferrous tended to balance each other up. Quite often the ferrous side of the business would not do so well, it gets buoyed up by non-ferrous and vice versa.
In the most recent climate both of them have been poor. In the non-ferrous world, obviously, there is a lot of uncertainty out there; people generally are suggesting that we are stuck in the current trading ranges for both copper and aluminum, but if they were to go strongly one way or other, it's going to have a major impact on earnings.
Michelle Applebaum - Michelle Applebaum Research
Can I ask another question?
Mark Millett
Certainly, go ahead.
Michelle Applebaum - Michelle Applebaum Research
Not for you Mark, for Keith. Is there any truth to the noise in the market place that you’re looking at the CMC deck and joist operations?
Keith Busse
We have no comment about what we are looking at or not looking at, Michelle.
Michelle Applebaum - Michelle Applebaum Research
Are they for sale?
Keith Busse
I think we all know that they are.
Michelle Applebaum - Michelle Applebaum Research
Okay, all right. Would you be interested potentially or…?
Keith Busse
We are in the business…
Michelle Applebaum - Michelle Applebaum Research
Okay, sorry. I’m done, thanks.
Operator
Next is Timna Tanners with UBS
Timna Tanners – UBS
Yeah, good morning. One, wanted to touch base with you a little bit just to make sure I understood, have you quantified, are you able to talk a little bit about how much in the second quarter might have been attributed to some of the different outages that you talked about?
Keith Busse
We have really tried to boil it down to that. You could say, well with the weakness you can afford to lose five days, but at the same time I don’t know what the sales team might have been able to actually rein in or reel in at that moment in time.
So there is no real way to quantify it and I think the best way to look at it is if we could have been at the same volume we were in the first quarter or improved, still had ability to improve upon it, you multiply that times some kind of a number underneath or better from a cost compression& stand point, you could have had remarkably better earnings in steel in Q2. So the potential is certainly there.
Timna Tanners – UBS
I understand, I guess we are also trying to follow up on which between the two different averages if I recall that you might argue that there would have been more potential to sell out a little better on the SBQ side than on the flat rolled side; is that conceptually the right way to think about it?
Keith Busse
Probably, it wasn’t SBQ anyway, it was Roanoke and it's strictly bar products. And as Dick said, they might have rolled seven to ten thousand more tons and they might have shipped 3,000, 5,000 tons more billets.
But any way you look at it, they probably wouldn’t have got beyond 120,000, 125,000 tons. But that would impact earnings by perhaps a couple of a million dollars in and of itself.
So there was definitely an impact from the transformer debacle at Roanoke, it did impact, the earnings drag was all about the transformer, it wasn’t about the market weakness.
Timna Tanners – UBS
Okay, got you. And then want to understand on Mesabi, I understood that you are saying that you’re still expecting to be profitable by the end of the year, but how do we think about that?
Is that meaning no outage costs, or -- I mean do we expect that $12 million or so to be reversed or are we expecting something beyond that? If you could talk a little bit more about Mesabi Nugget expectations?
Keith Busse
Well I was pretty impressed with Mark reaching right out there and saying he was going to be profitable by year end. At the rate it’s been going I’d like to just break even by year end, but a very positive outlook from his perspective.
Mark?
Theresa Wagler
Timna, the comment that Mark made wasn’t that it all gained in the second half, but also it offset the losses in the first half, he was really was speaking to profitability on a monthly basis.
Timna Tanners – UBS
Okay, so monthly not quarterly necessarily, right?
Theresa Wagler
Yeah.
Keith Busse
Yeah, I guess it's possible that you can have a profitable December and not a profitable fourth quarter.
Theresa Wagler
In short, things should be improving dramatically between now and the end of the year.
Timna Tanners – UBS
Okay, great. That’s what I was looking for, thanks a lot.
Operator
Luke Folta, with Longbow Research.
Luke Folta - Longbow Research
Hi, good morning everybody.
Keith Busse
Morning.
Luke Folta - Longbow Research
Quick question I had, just to follow up on Mesabi Nuggets, if things go as planned and you are able to reach profitability by the end of the year, can you give us just a ball pack figure on what sort of contribution we can expect for next year? Understanding there is a lot of variables in the calculation?
Mark Millett
As far as what the figuring price would be and at least we can just give you an estimate to be honest.
Keith Busse
And more importantly concentrate pricing.
Theresa Wagler
We really…I don’t think at this time we’d want to talk about 2011 contributions from Mesabi Nugget. Obviously we expect it to become profitable operations at that point and we are expecting that the utilization rate will be approaching capacity of a thousand metric tons during 2011.
So if all those things go well you can work costs. And the working key play, it really depends a lot with raw material costs as well but I don’t think we should be commenting on the actual dollar amount for 2011.
Luke Folta - Longbow Research
Okay, any update on the mining permit?
Keith Busse
Doing the battle, I don’t think mush difference on the last call. The EISW is in we are sort of negotiating and discussing; that would be the state right now.
Luke Folta - Longbow Research
Okay, an intercept please. If you could add some more color on your comment?
You said that the supply of scrap, Keith had mentioned it’s okay that maybe certain segments of the market may be better than others; I’m just trying to understand, what’s the real basis for your expectation of scrap and steel prices start to move up towards the end of the summer?
Keith Busse
I think the -- we probably did see a lot more capacity return serving a depleted store shelf, I do expect demand to continue to move slightly forward, not backward. I think a lot of the restocking we had approved in the first quarter some of those tons came off the shelf late in the second quarter and I think you had a lot of buyers expecting prices to come down with declining resource costs.
And so I think a lot of people probably are a little reserved from an all-direction perspective but there is not a lot of inventory out there. I expect you’ll see a little bit of strength actually return and I couldn’t possibly predict what takes place, but I think you’ve probably seen the bottom and you can see a strengthening environment both in resource with the value of resources sold into the market place and the value of steel products.
But I don’t think that’s a July event or necessarily an August event but I think as you walk through autumn and the fall, it's my belief you’ll see a strengthening environment. I think in that fairly weak levels that still exists and I believe that as the buyer realizes the bottom here is being reached, they may not aggressively come back in the market but they will come back into the market.
There’s some capacity that will be shattered. I’m sure in the meantime this will be a better match.
Luke Folta - Longbow Research
Okay, it appears to me that flows are better on the prime side and that’s (inaudible) is our last question.
Keith Busse
Flows on the prime side versus (inaudible).
Mark Millett
I would suggest that the prime flows will remain tight going forward and there is an up shift in our quarter entry across the steel mills and the utilization goes up. I think you’re going to see that strengthen in the course of an update.
On the up flipside, I believe that the flows are obviously from a seasonal standpoint, weather stand point that are good and as you -- again that mini utilization picks up and that’s the over September, the demand would go on pressing up along with -- I think (inaudible) activities is probably going to turn [ph] the market in the next month or two.
Luke Folta - Longbow Research
Alright, thanks a lot (inaudible).
Operator
Sal Tharani with Goldman Sachs
Sal Tharani - Goldman Sachs
Thank you.
Keith Busse
Morning Sal?
Sal Tharani - Goldman Sachs
Good morning, how are you? Hey Keith, can you give us some color on what the utilization rate was at Butler?
I know you had some disruption over there but what was it? In the second quarter and where are you now?
Keith Busse
I think utilization cut from a hundred down to whatever we did probably a little north of eighty in the second quarter, 83, 85, somewhere in that area. We’d expect with a weaker start in July that you’re going to experience the same kind of thing in the third quarter.
Sal Tharani - Goldman Sachs
Okay, but probably July is lower than 83; is that correct to say?
Keith Busse
Yes.
Sal Tharani - Goldman Sachs
Okay. But you obviously…
Keith Busse
Probably be in the 70’s would be my guess in July.
Sal Tharani - Goldman Sachs
Also, Dick, how much Cap are you carrying at the (inaudible) mill, how do you see that compared to last few quarters?
Mark Millett
Well in March that’s where we’re all jumping in, especially in inventories (inaudible) that are being maintained around that full lease.
Sal Tharani - Goldman Sachs
Is that -- you guys are for across the board, you think?
Mark Millett
We can’t tell you what other companies are doing but I think that they vary between 3 and 4 weeks is a pretty accurate statement in our own house and we wouldn’t get excited if they went down to 2. But we are not planning on carrying 6 or 8 either.
Sal Tharani - Goldman Sachs
The reason I am asking is because 55% of your scrap or (inaudible) does go to other mills and you might have some idea how other mills are positioned.
Keith Busse
Well I don’t think demand was all that strong given the exhibited weakness in order entry and other arenas as well. I mean we weren’t alone in experiencing some weakness.
If there hadn’t been that weakness out there, the price would have declined so there is weakness and some of these people probably didn’t play off as much inventory or produced as much as they had hoped for and that can leave them a little stronger inventory position as it did us. We’d probably wouldn’t even have 4 weeks if we had shipped in 100,000 tons.
But at 3 weeks -- it’s going to float around in that area for us all.
Sal Tharani - Goldman Sachs
Okay great, thank you very much.
Operator
Mark Parr with KeyBanc Capital Markets.
Mark Parr - KeyBanc Capital Markets
Okay thanks very much, can you hear me okay Keith Busse?
Keith Busse
Sure can.
Mark Parr - KeyBanc Capital Markets
Okay terrific. One of the things that I noticed as Garry had talked about seeing the bottom in the deck and joys business but some of the flat-rolled commentary around coated products -- seen to suggest continued weakness, is there -- could you give a little more color just about the construction marketplace and kind of where you are seeing some perhaps some auto making a little bit of upside and what segments of the market you look for continued weakness in there over the next quarter or two?
Keith Busse
We’re not rehearsing, we all have a different opinion but I do believe that we’ve probably seemed more a hot roll weakness than you are in coated products and painted goods and bi-painted. That’s held up better.
I think the first thing to go and obviously the first thing to come back sometimes is hot roll, Dick?
Mark Millett
Well, I concur with Keith Busse; that’s what we’ve been experiencing.
Keith Busse
And there were a couple of sectors that fell much faster than overall non residential construction (inaudible) one of those, so the dynamics of the different segments will be different.
Mark Parr - KeyBanc Capital Markets
Okay and then I guess if you would look at the others party or constructive business clearly rolling up and the structural side as well. If you looked at your total, the totality of your construction and markets which is -- how much of a change would you expect in shipping volumes in the third quarter relative to the second, based in what you seeing right now?
Keith Busse
Slightly improved but not dramatically.
Mark Parr - KeyBanc Capital Markets
Okay, alright thanks very much.
Operator
Mark Liinamaa with Morgan Stanley.
Mark Liinamaa - Morgan Stanley
Good morning, most of my questions have been answered but Keith maybe if I could just get some clarification. You talked about seeing some signs of optimism both flat-rolled or pricing beyond July, you also said that you didn’t expect scrap to move immediately.
Can you comment -- do you expect scrap -- the price moves in sheet to be led by scrap or do you think they will expand over and above what happened with scrap, thanks?
Keith Busse
I have always said that the scrap pricing movement and sheet steel pricing movement have some bearing but not as much as they do in bar products and structural products. They operate a little bit more independently.
It would not be impossible to see steel prices move up before scrap prices or ramble to move up. Generally speaking it works the other way but it wouldn’t be an anomaly to see steel prices which bottomed pretty hard find a little air before scrap prices do.
But that it’s --you know you never know.
Mark Liinamaa - Morgan Stanley
Thanks for that and maybe just a little bit of clarification; the press release in ton sounded a lot more cautious than a lot of your comments have, was there anything specifically when you said you are particularly cautious about the second half that you were trying to highlight, and from that that will be it for me, thanks.
Keith Busse
I don’t think so, I think we were just being cautious, I don’t have any startling revelations, one way or another I think the economy, so I said, will continue to just make anemic progress forward, inventories will kind of go up and have some impact. I just don’t think you are going to see the economy pick up and deliver GDP of 5 or 6%, I just don’t see that happening.
I think we’re probably going to stay in the 2% to 2 ½ to 3% range going forward on real demand and it’s better than going backwards but it’s nothing to write home to mum about either.
Mark Liinamaa - Morgan Stanley
But you feel pretty good that you’re trying to replicate earnings in line with the first half and the second itself.
Keith Busse
I would tell you that’s not impossible, yeah.
Mark Liinamaa - Morgan Stanley
Thanks, good luck with everything.
Keith Busse
Thank you.
Operator
Charles Bradford, Affiliated Research Group.
Charles Bradford - Affiliated Research Group
Good morning, a question on rail. Obviously you’ve designed the plants so that you can make the higher end rail available products, how long will it take you to get your rail qualified so that you can get into, for example, rail for high speed or for some of the more difficult products?
Mark Millett
Well Charles it’s a -- this is Dick. I would tell you that when you start to talk about high speed rail, that we can have a conversation for a week on that subject that -- the product requirements in that end of that definition in the United States, high speed is 79 miles per hour, 99 miles per hour and the maximum of 120 miles -- 129 miles per hour in different corridors and most of the high speed developments that are being looked at other than the specific projects in California and Florida, most of them that are actually a combination ones where there are in concert like Intract, where they host owner of one of the class ones and needless to say, the class ones are going to continue to put rail into their lines that are compatible with their basic needs, where they’d be co-hauling or roll freight hauls or whatever each one has a little bit specific difference in their line so the product what you normally think about is head hardened rail.
Head hardened is a premium rail product but is used only in probably about 50% of the applications but in very specific applications, not necessarily high speed. So we are working across the board on all product developments.
We are probably looking at products that are non head hardened and are much more vigorous laid because it is available to us today. It is available to fill up our line time and head hardened will just come and each owner of the rail has different qualification requirements and parameters; independent testing, 3rd party testing and in house inspections.
Charles Bradford - Affiliated Research Group
Okay, on the scrap side of the business, it seems to me that the spread between prime and obsolete is unusually large. That leads to possibilities, could prime come down more or could obsolete go up more?
Any ideas?
Keith Busse
Mark, you want to tackle that?
Mark Parr - KeyBanc Capital Markets
As you know Chuck, that’s expansion and contract -- dramatically and again I think prime scrap tends to be a lot tighter than it is sort of definitive amount of volumes available and given the method of manufacturing is dramatically off [ph] as compared to history. I do believe that that is where there’s going to be maintained.
Keith Busse
Chuck, I believe that the prime scrap is -- I am a little different than Mark -- got ahead of itself. It raced forward based on a lack of supply, a little further and faster than it should have and probably reality has been reached a little further and faster than it likely could have been.
Charles Bradford - Affiliated Research Group
Thank you.
Operator
Tony Rizzuto with Dahlman Rose & Company
Tony Rizzuto – Dahlman Rose & Company
Thank you very much. Hi gentlemen.
A question here just a follow up on here on Masabi Nugget and from your comments Mark, it seems that you are pretty comfortable that you are going to be able to achieve operating rate that would close you or get you to a point of profitability by the end of the year. Could you give us that operating rate for that second quarter?
And also I want to understand the mining permit process better in Minnesota. I know you’ve got your EIS in but -- and I know this has been a little bit more delayed than you kind of thought earlier but what else is there in the process in the chronology that we should be thinking about?
I know there is a public commentary and all those other types of things. Can you just refresh my memory of what all that entails?
Mark Millett
The principle step or the next step is for the state to finalize the EIS, such that they will support going forward into the public arena. So the first step is discussions, negotiations, whatever between the state and ourselves to fine tune that study -- that permanent [ph] application, at that moment in time it goes before the public or the commentary.
Then from the standpoint of actual mining, I think we’ve said that as soon we have the permit that 8, 10, 11 months thereafter, we would be in the grind. And relative to the price itself, it will probably be the price will concentrate in finding ourselves out there (inaudible) is in the 40 or $50 range; probably that would include depreciation and interest
Charles Bradford - Affiliated Research Group
And how does that compare right now to the concentrate that you are currently purchasing?
Mark Millett
Currently concentrate pricing it’s -- well what we are actually purchasing is a mix of Canadian -- former Canadian pricing so which is the market price, and also we have some material coming in at a discounted price the next year so -- but the current market price for concentrate out there is about $128- $130.
Charles Bradford - Affiliated Research Group
Okay, very considerable. And then as far as the operating rate in the second quarter, could you give us that or what were you, were you below 50%?
Keith Busse
Yeah, it is very weak obviously, if you are only producing 17,000 tons and you have a capacity of 500, it’s like 3% or something
Charles Bradford - Affiliated Research Group
Yeah, I didn’t see that 17,000 ton figure, thanks Keith, appreciate it. Thanks gentlemen.
Keith Busse
Welcome.
Operator
Brett Levy with Jefferies & Company
David Olkowski
Hi guys, it’s actually David Olkowski [ph] for Brad. Just a quick question on that revolver, is this solely available than under 24 million?
Jefferies & Company
Hi guys, it’s actually David Olkowski [ph] for Brad. Just a quick question on that revolver, is this solely available than under 24 million?
Theresa Wagler
It’s fully available expect for layers of (inaudible) and that’s around $15 million.
David Olkowski
Okay it’s negligible. And then can you remind me what your CapEx, I think you guys gave CapEx guidance right up about 115 million for the year, is that accurate?
Jefferies & Company
Okay it’s negligible. And then can you remind me what your CapEx, I think you guys gave CapEx guidance right up about 115 million for the year, is that accurate?
Theresa Wagler
Yes, we did. It couldn’t be somewhere less than that, between 125 and $115 million based on projects that we have in play so far.
David Olkowski
Okay, sounds good. And then one more thing I missed the hot-rolled galvanized number that you gave earlier, what was that?
Jefferies & Company
Okay, sounds good. And then one more thing I missed the hot-rolled galvanized number that you gave earlier, what was that?
Theresa Wagler
Sure, it was 95,000.
David Olkowski
95K, okay that’s it for me, thanks a lot guys.
Jefferies & Company
95K, okay that’s it for me, thanks a lot guys.
Operator
We’ll take a follow up from Sal Tharani.
Sal Tharani – Goldman Sachs
Hi, a quick question -- you made some comments on working capital, expectations for the third quarter. For the first two quarters it was like there has been a draw of about 155 million, should we expect that to be neutralized in the third quarter?
Theresa Wagler
Not neutralized in the fact that it would be providing funding of that much in the third quarter. What I was suggesting was that the third quarter will be basically neutral from a funding versus drop perspective.
It’s our current expectation and probably we should have some give back in the fourth quarter.
Sal Tharani – Goldman Sachs
Thank you very much.
Operator
At this time, we’ll take a follow up from Michelle Applebaum.
Michelle Applebaum - Michelle Applebaum Research
Hi, two questions, we go back and forth between products so quickly that I don’t know if I am keeping up. I thought you were talking about flat rolled when you said that inventories were being built in the first quarter until the business is better and then the second quarter customers start to take material off the shelves so inventories were being liquidated, is that what you said?
Mark Millett
I think lately on the quarter -- the second quarter there was probably a little destocking occurring as order entry was pretty weak for everyone in almost every segment. But I think those reports are yet to be generated.
Michelle Applebaum - Michelle Applebaum Research
Well, I was going to say like during your call the MSEI inventory just came out, and flat rolled inventories were actually up about 9% in June and they are the highest level in over a year, 18 months, so would you say that they had destocking has yet to come, based on that new information?
Keith Busse
I would tell you probably not because the inventory level as an absolute number is still pretty low.
Michelle Applebaum - Michelle Applebaum Research
It is, okay. Alright, so you think that the destocking is over?
Keith Busse
I don’t think they are going to go any lower, they might actually build but it’s hard to measure because if you see increasing shipments that would accelerate it.
Michelle Applebaum - Michelle Applebaum Research
Got it. And then I wanted some clarification on the second half; in your release you said that you had a cautious outlook for the second half, and did you say it was possible for second half to be consistent with the first half on earnings?
Keith Busse
I did.
Michelle Applebaum - Michelle Applebaum Research
Okay, when you said possible, is it like one out of ten, or one out of a hundred or five hundred?
Keith Busse
We are not going to get into that, that’s just an opinion. We said we’d give you guidance for the third quarter later and we will.
Michelle Applebaum - Michelle Applebaum Research
Okay, alright. Well thank you.
Keith Busse
You’re welcome
Operator
We’ll take a follow up from Luke Folta.
Luke Folta - Longbow Research
Just a quick follow up for Gary, you guys say that you’ve seen some improvements in the fabrication segment; how do you rate the prospects that we get through a break even by the end of the year? What level of possibility do you think?
Keith Busse
The segment should be well above break even by the end of the year, we should be showing monthly earning by the end of the year.
Luke Folta - Longbow Research
Excellent, thanks a lot Keith Busse.
Operator
At this time there are no further questions, I’ll turn things back over to our presenter for any additional or closing remarks.
Keith Busse
Thank you Vickie, again, thank you ladies and gentlemen for excellent questions. Thank you to the 5900 people who make what I think are extraordinary achievements in this industry possible every day.
I don’t know if there is a better team out there delivering more EBITDA for their shareholders than this steel team and this recycling team. So thank you again for being part of our family, bye now.
Operator
And that does conclude today’s teleconference. Thank you all for joining.